Lesson: Money as the medium of exchange What Is a Medium of Exchange

Characteristics of a Medium of Exchange
An effective medium of exchange has certain characteristics. Most of all, its value is widely recognized and reasonably stable. Even so, the proliferation of currencies around the world makes it necessary for travelers to exchange their native currency with a local currency in order to do business.
For sheer practicality, a medium of exchange must be dividable into a number of smaller units that can be added or subtracted to equal the payment charged for a specific product or service.
The governments that issue currency are responsible for most of their qualities. They must make certain that the currency is made widely available to the public, that it is not easy to copy or reproduce, and that it is available in sufficient quantities as needed.
Some of these characteristics may not apply to cryptocurrency, which has no physical existence. The extreme volatility of cryptocurrency prices may prevent them for now from being widely adopted as a means of payment.
Purposes of a Medium of Exchange
As noted, the primary purpose of a medium of exchange is to smooth transactions between parties. An effective medium of exchange has a reasonably stable value that is known and accepted by all parties.
That relative stability gives currency, as the primary medium of exchange, another important purpose: It can be stored for a long period of time. The concepts of saving and investing evolved from the potential of currencies to serve over the long term as stores of value.
Alternative Currencies As a Medium of Exchange
Alternative currencies have appeared throughout time during periods of economic duress to spur commerce or buttress a national currency.
In 1907, a cascading series of bank failures caused widespread cash shortages.1 Companies had to issue company scrip and other forms of emergency currency in order to pay their workers.
Workers could redeem the scrip for food and services, or they could hold onto it for future redemption once U.S. dollars became available. Such informal money substitutes are little more than an IOU and depend on the reputation of the issuer for their acceptability as a form of payment.